Dubai debt shock knocks £14bn off bank shares

Britain is in the front line as fears grow over exposure to the Gulf emirate's financial problems. Sarah Arnott reports on a day that sent global stock markets reeling

Dubai was the poster child of the economic boom: a world of unimaginable luxury, impossibly tall towers, and islands shaped like palm trees. This week it became the epitome of recessionary bust.

Global stock markets were left reeling yesterday after the city-state's spectacularly debt-ridden Dubai World holding company asked for an extra six months to pay the $4bn (£2.4bn) chunk due next month. In London, the stock market dropped by 3 per cent, its worst day since March. The French and German markets fared little better, and America's Dow Jones was only saved by being closed for Thanksgiving. Even sterling wavered, falling to its lowest rate against the euro for a month. But it was Britain's battered banks that were the worst affected. Fears over the extent of their exposure to Dubai's $80bn debt knocked nearly £14bn off their value by the end of the day.

The Gulf emirate's financial problems come as no surprise. It has already been bailed out to the tune of $10bn by fellow United Arab Emirates (UAE) member Abu Dhabi, and it had managed to scrape together another $5bn from two Abu Dhabi banks hours before the request for a "standstill agreement" to give Dubai World time to "restructure" itself. But global financial confidence is only just starting to recover from last year's banking crisis. And it is not yet known how much is at risk, and where.

Part of the problem is the scale. Dubai World's reach is truly vast. Within the main holding company are 10 subsidiaries, each a monster in its own right. The highest profile is the Nakheel property group, which owes the $4bn due next month. Nakheel is behind the Palm project that has become synonymous with Dubai's ballooning property market. The three palm-shaped islands, built in the waters of the Gulf, looked like a developer's triumph. The first island – the self-proclaimed Eighth Wonder of the World – sold its initial 2,000 villas within a month and included David Beckham and Brad Pitt on its star-studded list of buyers. But Nakheel is just one part of the sprawling empire. DP World, another division, is the world's fourth biggest ports operator, which includes the UK's London Gateway and Southampton facilities, and the Tilbury Container company, in its global portfolio. Other divisions span everything from hedge funds to Scotland's Turnberry golf course.

By yesterday lunchtime, Europe's financial markets were awash with rumours about which banks are the most in danger from the Dubai debt and what the implications might be. But while estimates of European institutions' exposure gyrated from $13bn to $40bn, there was widespread agreement that the British are the most exposed. "Everybody is looking at who is affected the most and the UK banks are standing in the front line," Shahin Vallée, BNP Paribas's head of Middle East strategy, said.

Nobody expects Dubai to default on its debt, and there is little immediate danger for the state's holdings abroad. But the shock has real financial repercussions, and even if Abu Dhabi does step in with more funding, Dubai World's reorganisation will cost its creditors money. Beyond that, the bigger danger is the blow to global economic confidence, not least because no one knows the scale of the problem. "There are layers of cloud and uncertainty," Mr Vallée said. "Dubai World is not a company, it is a conglomerate with very limited corporate governance and financial transparency so no one knows what its assets are or what the real debt is." The danger is that the crisis stamps out the signs of life helping lift the world's economies out of recession. "The consequences could be to slow down global capital flows again because banks are reluctant to stretch their balance sheets," Mr Vallée said.

For Dubai itself, the money may prove to be the least of the problem. Until now, the Dubai experiment began in the 1950s by Sheikh Rashid, the father of the current ruler, has been an incredible success story. The revenues from the state's minimal oil revenues were initially used to turn it into a major regional trading hub and before long most of all the goods flowing into the Arabian peninsula were going through Dubai. When Sheikh Mohamed, the present incumbent, decided to take the scheme a step further and turn the city into a financial centre and global tourist destination, Dubai hit the big league. Vast amounts of money were spent on property, infrastructure and tax breaks to turn it into the playground of the rich and famous. Such was its success in luring buyers from around that world that between 2003 and 2007 property prices in some parts of the city quadrupled. There seemed to be no limit to the luxury: the opening night of the Palm Island's Atlantis Hotel cost a whopping $20m and included a set from Kylie Minogue and $1m of fireworks.

But the key to the metamorphosis was image, and all the growth was built on debt. "Brand Dubai is not just sun, sea, sand and luxury, it is that everything is possible, the sky is the limit," Professor Gerd Nonneman, a Middle East expert at Exeter University said. "It was a cycle: the brand brought in buyers, which pushed up prices further."

By the end of last year, with property prices slumping by up to 70 per cent, development stalled, plans for the third Palm Island were scaled back, plans for a tower a mile high were cancelled, and more than 400 projects with a total value topping $300bn were put on ice.

On the ground, the congestion which plagued the city has eased as tens of thousands quit after losing their lucrative jobs. The bars in Dubai's luxury hotels still buzz with weekend revellers, but the teeming crowds which once flocked to popular nightspots such as Left Bank in the sprawling Madinat Jumeirah hotel complex have become noticeable by their absence. The property sector, once the lifeblood of the Dubai expatriate workforce, is now shattered, with thousands laid off. Architects, estate agents and construction staff have vanished after building projects ground to a halt. Dubizzle, a local website similarto eBay, has been flooded with adverts from people selling.

But a charm offensive from Sheikh Mohamed had just about held world opinion together. And even this time, Abu Dhabi will not let Dubai drown. "Though there is rivalry between the two ruling families, is it important for Abu Dhabi that people in the outside world don't get the impression that the UAE is a busted flush," Professor Nonneman said. The balance of power in the UAE must shift as Abu Dhabi extracts what political capital it can from its injections of cash he thinks. And the debacle will tarnish the gilded image that was the bedrock of Dubai's success. "It has taken decades to build up 'Brand Dubai' and this is a spectacular blow."

Additional reporting, Ed Alexander, Dubai

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Solvency II Project Manager - 10 month contract - £800 p/d

£800 per day: Ashdown Group: A highly successful, global financial services co...

SThree: Trainee Recruitment Consulant

£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250...

Guru Careers: Financial Controller

£45 - £55k DOE: Guru Careers: A Financial Controller is required to join a suc...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£12500 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Day In a Page

Mullah Omar, creator of the Taliban, is dead... for the fourth time

Mullah Omar, creator of the Taliban, is dead... again

I was once told that intelligence services declare their enemies dead to provoke them into popping up their heads and revealing their location, says Robert Fisk
Margaret Attwood on climate change: 'Time is running out for our fragile, Goldilocks planet'

Margaret Attwood on climate change

The author looks back on what she wrote about oil in 2009, and reflects on how the conversation has changed in a mere six years
New Dr Seuss manuscript discovered: What Pet Should I Get? goes on sale this week

New Dr Seuss manuscript discovered

What Pet Should I Get? goes on sale this week
Oculus Rift and the lonely cartoon hedgehog who could become the first ever virtual reality movie star

The cartoon hedgehog leading the way into a whole new reality

Virtual reality is the 'next chapter' of entertainment. Tim Walker gives it a try
Ants have unique ability to switch between individual and collective action, says study

Secrets of ants' teamwork revealed

The insects have an almost unique ability to switch between individual and collective action
Donovan interview: The singer is releasing a greatest hits album to mark his 50th year in folk

Donovan marks his 50th year in folk

The singer tells Nick Duerden about receiving death threats, why the world is 'mentally ill', and how he can write a song about anything, from ecology to crumpets
Let's Race simulator: Ultra-realistic technology recreates thrill of the Formula One circuit

Simulator recreates thrill of F1 circuit

Rory Buckeridge gets behind the wheel and explains how it works
Twitter accused of 'Facebookisation' over plans to overhaul reverse-chronological timeline

Twitter accused of 'Facebookisation'

Facebook exasperates its users by deciding which posts they can and can’t see. So why has Twitter announced plans to do the same?
Jane Birkin asks Hermès to rename bag - but what else could the fashion house call it?

Jane Birkin asks Hermès to rename bag

The star was shocked by a Peta investigation into the exotic skins trade
10 best waterproof mascaras

Whatever the weather: 10 best waterproof mascaras

We found lash-enhancing beauties that won’t budge no matter what you throw at them
Diego Costa biography: Chelsea striker's route to the top - from those who shared his journey

Diego Costa: I go to war. You come with me...

Chelsea's rampaging striker had to fight his way from a poor city in Brazil to life at the top of the Premier League. A new book speaks to those who shared his journey
Ashes 2015: England show the mettle to strike back hard in third Test

England show the mettle to strike back hard in third Test

The biggest problem facing them in Birmingham was the recovery of the zeitgeist that drained so quickly under the weight of Australian runs at Lord's, says Kevin Garside
Women's Open 2015: Charley Hull - 'I know I'm a good golfer but I'm also just a person'

Charley Hull: 'I know I'm a good golfer but I'm also just a person'

British teen keeps her feet on ground ahead of Women's Open
Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

Turkish President Erdogan could benefit politically from the targeting of the PKK, says Patrick Cockburn
Yvette Cooper: Our choice is years of Tory rule under Jeremy Corbyn or a return to a Labour government

Our choice is years of Tory rule under Corbyn or a return to a Labour government

Yvette Cooper urged Labour members to 'get serious' about the next general election rather than become 'a protest movement'